Thought Leadership Archives - Page 2 of 3

We get it. Running a startup is a crazy roller coaster ride. That is why it is important to find and bring the right VC partners on board with you. You will probably meet many before deciding on a core team. And it all starts with a convincing pitch that is engaging, clear and concise.

When I googled “how to pitch my startup”, I got more than 42 million hits. I am sure most of the advice offered is sound, if a little generic.

Having worked in the startup ecosystem in both Silicon Valley and Southeast Asia, I have noticed that there is a difference in the way founders here approach their pitch. I have noticed that Southeast Asian entrepreneurs tend to be more conservative in their pitch approach and more reluctant to talk about their achievements (and I include myself in this category). There are many cultural reasons for this but such reticence does not serve startup founders well, especially when making their pitches.

Over the years, my team at Genesis and I have attended multiple startup pitch sessions and have given my share of feedback and useful tips to help founders in Southeast Asia sharpen their pitch. Here’s a quick summary of those feedback:

Be clear about your ask

It is perfectly fine to be upfront about what you are looking for – be it mentorship advice or an investment. Many founders feel shy about talking about money so early in a discussion but trust me, it is helpful for the VC to know your objective from the start.

For instance, if you are looking for funding, you can start by saying, “Thank you for your time today. I am looking for $6m funding for a 10% share of my agri-tech company.”

Or, if you are looking for strategic partnerships, “Thank you for your time today. I am looking for partners in the agri-tech and/or logistics space who can add value to my business.” It is also reasonable to seek introductions to business contacts or possible advisors.

Be proud of your mission and credentials

Once I sat in on a pitch from an edutech company and it was only after 5 or 6 slides that she revealed that she is a geneticist. Immediately that became interesting to me. What is the connection between genetics and education?

Most founders tend to have business, finance or engineering backgrounds. So when someone with academic achievements and industry experience turns up to share why they are on this mission, it certainly catches the attention of an investor.

Likewise, for your mission. Whether you are solving a payment problem or moving 1 ton of ugly food per day, if you are not excited about your mission, no one else will be.

So do speak with positive energy and conviction. I know this is not natural for many of us in Southeast Asia but it is important to “infect” the VC with your enthusiasm.

Be humble when receiving feedback

This sounds contradictory to #2 but it makes sense. The VC industry is a small one, particularly in our region. One of the first questions that VCs ask themselves is “can I work with this entrepreneur over the next 3-4 years and help build this business?”

“VCs invest in people, not ideas or technology.” Most investors are placing a bet on the founder’s ability to successfully handle the multiple challenges of growing a startup. And founders who are unable to handle a couple of tough questions in a pitch are less likely to raise money from investors.

So treat the feedback as a gift. An hour that a VC set aside to listen to your pitch may not end up in an investment. But the feedback could bring fresh perspectives, new ideas and insights for your business or even how to improve your pitch.

Be concise with your elevator speech

It is always good to be prepared to talk about your startup concisely. You’ll never know when you’ll meet a potential investor.

We suggest an elevator speech along these lines:

Think BIG: What is the end goal (e.g. save 10 tons of ugly food per day)?
Start SMALL: What are the low hanging fruits that you are plucking today?
Move FAST: How are you going to scale?

Starting with your Big Idea allows you to plant a seed into the investor’s mind. And if you get interrupted and don’t get to the other two parts of your elevator speech, at least you’ve communicated your mission. This leads me to the final point.

Be jargon free

Most VCs are finance- or economics-trained. A few of us are engineers by training. Even fewer of us were medical professionals.

While we may have picked up terms like “NFT”, “Metaverse” or “DAO”, it helps if you use layman terms in your pitch. Try pitching to your family or friends first; if they can understand what your business is about, the likelihood of an investor understanding it would be higher.

For an idea of a jargon-free pitch deck, do take a look at AirBnB’s early pitch deck.

Last but not least ….

The tech and venture market will have its up and down cycles. Whatever the climate, there will always be venture investors looking for the next unicorn or decacorn. When you get an hour of time with a VC or a partner, it is more important to be ready with your pitch. And be prepared to evolve that pitch deck. You will be fascinated when you see the 40th version compared to your first deck.

We wish you much success and hope that these tips are useful in helping you elevate your pitch and raising the next round of funds.

(A version of this article first appeared on LinkedIn on 21 July 2022.)

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It has been an incredibly busy two months for us at Genesis Alternative Ventures, the current market volatility notwithstanding.

In April and May, we took advantage of the reopening of global borders to visit our investors, partners, and portfolio companies in Tokyo, Seoul, and Indonesia. In May, we hosted our General Partners Advisory Board and Limited Partners to share the progress of the Fund and to discuss the macro-economic investment outlook. It was refreshing to catch up with everyone face-to-face and to reaffirm the trust that we built via two years of virtual meetings.

All the discussions I had were enlightening, insightful and relevant in the current market uncertainties and I thank everyone for sharing your thoughts and time so generously. As one good deed deserves another, I thought it would be useful to sum up and share my takeaways that might help guide us through these turbulent times:

Growth of venture debt : Amid rising interest rates and increased market volatility, private debt tends to shine and venture debt providers across Southeast Asia, India and the US are reporting a surge in deals and a growing pipeline.
Cash is King: With tighter funding market environment and falling valuations, startups should look for opportunities to consolidate and acquire good assets to strengthen their position while cutting back on cash burn to focus on profitability and preserve cash runway
Keep Calm and Carry On: Venture investors have indicated continued support for existing companies and will allocate more capital to their portfolio, instead of hunting for new ones. However, with freshly minted Southeast Asia venture equity funds like Jungle Ventures Fund IV ($600m), East Ventures multistage $550m venture and growth fund, Mass Mutual Ventures Fund II ($300m), there is still ample liquidity for early-stage companies seeking entry ticket funding. However, founders are advised to sharpen their pencils as the days of funding back-of-envelope ideas are gone.
There ARE Alternatives to TINA (There Is No Alternative): Navigating a challenging environment, sophisticated investors are pivoting from traditional portfolios that were based on a mix of public equities and fixed income. Increasingly they are looking for an alternative bucket of private equity, venture debt, and real estate where opportunities for better yields than liquid assets, with lower volatility and less correlation to headline risk.

Next month, we hope to share some insights on Founders’ sentiments from a survey of the entrepreneur community. I thank you in advance to all those who have kindly agreed to be surveyed and share your thoughts with us.

Disclaimer: The content in this article is meant to be informative and for general purposes only. It is not and shall not be construed as investment advice.

(A version of this article first appeared on LinkedIn on 3 June 2022.)

What a difference these past two years have made!

Whenever I was invited to speak about venture debt in the past, I always start by explaining to the audience that venture debt is a form of business financing that is tailored for venture-backed, high-growth startups who do not have the collaterals nor track record generally required by traditional banks. When used appropriately, venture debt is an attractive form of growth funding because it minimizes dilution of a founder’s (& early investors’) ownership stake.

Fast forward to February 2022 where I addressed a virtual room of startup entrepreneurs from SEA Founders – a community of growth-stage founders in Southeast Asia. I was very heartened by the sophisticated level of understanding about financing tools to power startup growth. Comparing this to when I first started out in venture debt in 2015, these founders have certainly become more acquainted with its use case.

However, I thought it would be useful to clarify some terminology and practices. This will be a handy guide for founders when talking to venture lenders as part of their next fund raise:

Convertible debt is not venture debt.

Venture debt is a bit like a mortgage loan. If we want to buy a house, the bank will provide us with a mortgage loan that we progressively pay down. Before we accept the loan, we would do our maths, asking ourselves, “how much do we have to pay on a monthly basis for this home loan? What are we comfortable with?” Once we decide, we don’t think about it much until the home bank loan is fully repaid. Once fully repaid, the house is ours.

On the other hand, convertible debt is where we borrow money to buy a house, but the lender has the option to decide if he wants the loan repaid in cash or take a portion of the house in return. Here the borrower has to deal with the uncertainty of whether a part of the house may eventually belong to someone else. Hence, a convertible debt is not venture debt.

Shares are not given free to lenders via warrants.

Due to the risk profile of a startup company, venture lenders will ask for warrants, which is an option to buy some shares in the company in the future at an agreed price. I think it’s important to understand that you’re not giving the equity warrants to the lender for free. The lender actually needs to pay and convert the option into shares of the company at a cost.

The way we describe it at Genesis is that we are investing debt into the portfolio company while simultaneously playing the role of small-time equity investor. Because we believe in your company, we’re willing to provide debt financing to grow the company. And because we have done our homework as an investor, we would love to be able to put some equity to play too.

Covenants can be used for instilling financial discipline

Many founders’ initial reaction to covenants is generally negative. However, I believe if designed reasonably, it can bring financial discipline and performance milestones for startups.

Early-stage start-ups tend to have big dreams. Founders would say to me “I am aiming for five million revenue this year and twenty million next year. Based on P&L. I think I am comfortable with a debt to equity ratio of forty percent, so I want to borrow five million dollars in venture debt.” But when we propose business and financial covenants around the loan, founders would come back and revise their projections e.g., “I can’t grow 4x within 12 months.”

A very canny CFO from one of our portfolio companies once shared that taking on venture debt has allowed him to introduce financial discipline within his startup. An example would be working out the mortgage repayment I described earlier and discipline is needed to make repayments on time. Having a venture lender onboard gives him the confidence that he has passed the stringent credit litmus test and he can confidently tell prospective VCs that he has a track record of being financially disciplined. Therefore covenants that are structured reasonably will help companies grow, rather than suffocate. Hence it would be useful to have a candid conversation with your venture debt lender on the purpose of the proposed covenants.

I hope the above “advanced level” clarifications about venture debt is useful for you. For an elementary overview of venture debt, please read this article on the “Top 10 Questions Every Founder Asks About Venture Debt.” If you have any questions on how venture debt can support your startup’s growth, please do not hesitate to contact me.

(A version of this article first appeared on LinkedIn on 28 February 2022.)

Did the angel investor, Han Ji-pyeong, in the Netflix show “Start-up” inspire you? While the hit K-drama series was fictional, it offered some interesting peeks into the start-up world and venture capital (VC) funding.

If you are keen on a career in VC, our Managing Director, Jeremy Loh, shares his career journey and some tips:

Genesis (G): How did you get started in the world of venture investing?

Jeremy (J): After completing my PhD in engineering and doing academic research at Imperial College, I returned to Singapore in 2004 and joined A*STAR, the R&D agency supported by the Singapore government.

Did you know A*STAR has more patents than Harvard or MIT? Yet few ideas were successfully converted into real businesses. I’ll share my experience to commercialise one of my patents. My team put together a business plan for an infectious disease diagnostic kit and went out to raise funds. That whole process made me realise that I did not understand the entire concept of starting and running a business.

I have a PhD and was backed by a top-class research team. But at the end of the day, if we cannot commercialise and turn that idea into a business, we are only half successful.

So I started looking at how I could gain experience with the business side of things and came up with two options: I could get an MBA, or join the venture capital industry as it straddled both the technological and the financial aspects of venture creation. Through serendipity, I was presented with an opportunity to join Bio*One Capital, a $1billion healthcare fund under EDBI that invested in medical devices, drug discovery development, stem cells etc.

Looking back, I realised that my entry in the venture capital industry was a transition. What I did was to leverage my domain expertise in precision and bio engineering to open doors into the financial industry.

G: I hear that the VC space is fast-paced and cut-throat. How true is this?

J: One thing that I can say for certain is that I have not had a boring day. Every day I am energised by start-ups and their ideas to solve a pain point through the clever application of technology. Today, it can be a medtech that can diagnose infections faster and tomorrow, it can be a fintech to serve the unbanked majority.

As for the culture, I can only speak for Genesis and the co-investors we partner with. We are family-oriented and collaborative – we constantly share deals with each other. This is an industry built on trust and if you want to go far, you have to build meaningful and positive relationships.

G: What do you look for when you hire?

J: Typically, venture capitalists hire MBAs, serial entrepreneurs, or people with corporate finance backgrounds. At Genesis, we believe in someone who wants to make a difference:

We look for an intellectually curious mind: someone who is not afraid to ask, “why not?”.

Someone who reads extensively to feed that curiosity.

Someone who challenges himself/herself to be in the shoes of the consumer or enterprise who would buy that product or service. This is the hardest skill to learn, as compared to getting a certificate in financial or technology. But it can be learnt.

G: Any pre-requisite technical skills?

J: You would need to have either a technical (engineering) or financial background to begin with. At Genesis, we will train you up and provide you with exposure to:

deal origination – networking in the startup ecosystem to get access to the best deals to invest capital
financial modeling with Microsoft Excel and analysing financial statements
Able to communicate confidently as you will have to present the investment opportunity to the leadership team and investment committee.

G: What advice do you have for undergraduates or fresh graduates who aspire to a career in venture capital?

J: One of the best ways is to serve an internship that is at least 6 months long with a venture fund or financial institution. Why six months? This is the minimum period you will need to gain valuable experience in how a deal flows from origination to execution. Not just one deal, but at least two or three different types of deals in different industries.

At Genesis, our internship program puts the interns through the same pace and vigour as though you are a full-time analyst in the firm. You will meet incredible founders and amazing venture capitalists. You will also work with a team that is fun and diligently trying to find that next Unicorn. We believe investing time to train up the next generation of venture investing talent will eventually have a positive impact for the Southeast Asia startup scene.

Our internship programme runs year-around so do drop your application at contact@genesisventures.co. We will contact you once a position becomes available.

Our Partner and co-founder, Ben J Benjamin answers some frequently asked questions about venture debt from start-up founders.

1. Who is venture debt for?

Venture debt is ideal for early-stage venture-backed companies that are growing rapidly and that need working capital to fund further expansion, undertake new projects, or acquisition. The key benefit is that founders (and other early investors) do not have to give up as much of their ownership in a funding round. In effect, venture debt can empower growth while minimizing equity dilution.

My colleague, Eddy Ng, shares how to structure your debt for success here: Deal Structure for Venture Debt Success

2. What about interest rates? And collateral?

In terms of payment, founders must consider the following two components:

Interest: usually a flat rate of about five to eight percent
Warrants: comprises about 15 to 25 percent of the loan quantum.

Given the nature of a startup’s business, very few of them have any collateral to pledge to the loan agreement. Unlike banks, venture debt lenders will not ask for personal guarantees or collateral. Instead, lenders will ask for warrants and include covenants to ensure repayment.

3. What are the typical payment terms?

The loan usually has to be repaid within 36 months, fully amortized. The warrant is separate from the loan. Depending on the company’s lifecycle or nature of business, the warrant period can be anywhere between five to 10 years. The venture lender would be free to exercise the warrant during this period.

4. Can I buy back my warrants?

In most cases, the buyers of warrants are usually the founders and/or their existing investors. While the stakes are not huge – warrants generally represent a maximum of two percent of the company – it is a good opportunity for such parties to increase their stakes before a liquidity event (such as an M&A, IPO, or trade sale, for example).

5. My start-up is constantly approached by venture funds. Why should I consider venture debt, even though the interest rate is not much higher than banks?

When raising funds, the key issue that entrepreneurs and investors alike face is equity dilution.

Just imagine if you could raise 20 to 30 percent of the entire series in less dilutive debt. (There is minimal dilution as the warrants may be exercised at some future date when the company is successful, as pointed out above in #4.)

Instead of taking that 20 to 30 percent equity dilution at the early stages of the company’s growth, it makes sense to use venture debt to minimize dilution, especially if you have the conviction that the business will increase in value over the long term.

6. As an entrepreneur, I can go to my existing equity investors and raise convertible notes. Why should I consider venture debt?

Many founders ask this question. A convertible note is generally converted into equity when the business performs well. So, it is not less dilution – it is just delayed dilution. And that dilution is 1:1; in the final analysis, it feels like full equity dilution.

7. Venture debt funds add little value to entrepreneurs.

There is a misconception that venture debt funds exit from the start-ups as soon as the loan is repaid. However, the reality is that venture debt funds do have skin in the game. As warrant holders, we are very much interested in the long-term success of the company. In fact, several of our portfolio companies have returned to us for additional debt because they enjoy the benefits of our experience, networks, and value-add.

8. I like the idea of minimizing equity dilution. Can I use 100% debt to fund my business growth?

As with any company, a balanced capital approach is important when building your books. Just as we would say there is a space for venture debt on the balance sheet for early, high-growth tech companies, it would be unrealistic to suggest that debt should take up the lion’s share in the growth journey.

Venture debt is just one of the many options available for businesses. There are many tools for fundraising, so pick the most appropriate one in the context of your existing capital structure, shareholding, and business plans.

9. When is the right time for start-ups to use venture debt?

Timing is everything. A company that is too young (with poor cashflows, or without a strong balance sheet) will find it difficult to raise venture debt. A company that already has a capitalization table with good investors on board, and has either a strong balance sheet or strong cashflows, will find it easier to raise venture debt from a well-known lender.

It is also worth considering raising venture debt in conjunction with an equity raise. This allows the company to access additional cash to extend the runway to help achieve a larger milestone and a higher valuation at the next round of financing.

10. Any advice for founders when approaching venture debt providers?

We appreciate founders who are honest and forthright from the start. The journey to build a successful business will take three-, five-, or 10-years, so mutual trust is very important.

So, start a conversation with a venture debt provider, even before you need to raise debt. Take time to understand how venture debt works, and the key terms that come with it. Help us understand your industry, business model, and plans. This will accelerate the process when you are ready for venture debt.

Finally, choose your venture debt partner with care. Many founders focus their venture debt conversations on price and loan quantum. They should also consider choosing a venture lender who can be a long-term funding partner, and ask important questions such as, “Am I dealing with a venture lender who understands how a start-up grows and can the lender add value?”, “What is their track record of working with companies that hit hard times?”, and “Will they take a long-term perspective?”.

If you have any additional questions, please do reach out to Ben.

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Martin Tang is the reading champion in Genesis – he is an avid reader and believes that reading the experiences of people who have gone before is one of the best ways to learn. As he always tells us, “a person who does not read is no different from a person who cannot read.”

If you aspire to a career in financial services, especially in the venture capital space, Martin recommends the following books to help you hit the ground running.

1. Zero to One: Notes on Startups, or How to Build the Future by Peter Thiel & Blake Masters

Considered the first book that inspired many aspiring startup founders, this book delves into the new ways we can create value and innovation in any area of business. This comes from a very important skill that every entrepreneur must master – learning to think for yourself.

2. Never Finished: Unshackle Your Mind and Win the War Within by David Goggins

The author, a retired US Navy SEAL and ultra-marathon runner, shares his philosophy on how to master your mind, overcome physical and mental obstacles, and cultivate resilience to achieve one’s fullest potential.

3. The Magic of Thinking Big by David J. Schwartz

A self-help classic, this book emphasizes the transformative power of positive thinking and offers practical tips to overcome self-doubt and cultivate success. It underscores the impact of one’s mindset on personal and professional achievements and is invaluable for individuals who are “feeling stuck”.

4. Start with Why by Simon Sinek

This book explores how successful leaders and organizations inspire action by communicating their “why” — the purpose, cause, or belief that motivates them. In contrast to businesses that focus on “what” they do or “how” they do it, the most influential and innovative ones start with a clear understanding of “why.” Sinek illustrates how a compelling sense of purpose can create a loyal following and drive success.

5. The Power Law: Venture Capital and the Art of Disruption by, Sebastian Mallaby

“The future is not predictable; it is only discoverable.” In his book ‘The Power Law,’ Sebastian Mallaby offers a behind-the-scenes look at the people who financed industry giants like Google, SpaceX, and Alibaba. It dissects the successes and failures and offers insights into the tech industry’s evolution and its global impact.

6. What It Takes: Lessons In The Pursuit Of Excellence by Steve Schwarzman (co-founder of Blackstone)

As you can tell, I am a big fan of Blackstone! Steve Schwarzman is the grand daddy of the investment industry. He took US$400,000 and co-founded Blackstone – a firm which manages US$684 billion (as of Q2 2021). He generously shares his expertise and insights on what it takes to achieve excellence. I am always re-reading this book because I find new wisdom every time.

7. Good to Great: Why Some Companies Make the Leap…And Others Don’t by Jim Collins

This is an excellent book – backed by tons of deep data and research and is well-written. It is full of insights about why some companies go from good to great, while others fail for the same reasons. What intrigued me is the “curse of competence” that hinders companies from achieving greatness. I will not spoil it for you; read the book and find out!

8. Laughing at Wall Street: How I Beat The Pros At Investing (By Reading Tabloids, Shopping At The Mall And Connecting On Facebook) by Chris Camillo

Investment success is not mystical. It comes from being very observant of your surroundings and identifying trends. This book is full of engaging anecdotes and common-sense explanations.

9. David & Goliath: Underdogs, Misfits And The Art Of Battling Giants by Malcolm Gladwell

This is a classic Malcom Gladwell book where he sheds light on how we think about disadvantages and obstacles. We all know the story of how a shepherd boy, David, felled the mighty Goliath with a sling and a stone. The author challenges us to re-think about the “Goliaths” in our lives and what successes can arise out of adversity.

10. Outliers: The Story of Success by Malcolm Gladwell

Another classic by Malcom Gladwell. Backed by data, he traces the reasons for the success of some overachievers. What do Bill Gates and top football professionals have in common? Are they really that much more different from us normal folks? This book changed the way I looked at success.

We hope this list will help you become a more successful version of yourself.

Over the past two years, we have seen how the global pandemic adversely affected companies across a wide range of sectors from the implementation of lockdowns and travel restrictions, to an increase in the visibility and transparency of supply chains. Despite being a difficult year for numerous businesses, many startups, especially in the Southeast Asia region have powered through.

While the global pandemic will eventually recede, the impact of business decisions made during these pressing times will go a long way. Startups that raise capital and have a spare dime for rainy days like these will have an edge.

Cash Burn J-Curve

One of the most persistent challenges for startups is to sufficiently capitalize the business from the inception of the company until profitability. US startups have had the good fortune of leveraging on venture debt for several decades. Despite a very challenging Covid year in 2020, startups in the US received debt financing valued at more than $25 billion^[1], the third consecutive year for the market to surpass $20 billion in venture loans.

Most startups traditionally utilize equity as their source of capital and go on to raise billions of dollars to fund the J-curve growth of their business. The J-curve is commonly used to illustrate the tendency of a startup company to produce negative net income initially, and then deliver accelerated positive results as the company matures. The negative net income area above the “J” represents the total cash needed to achieve profitability and the typical startup company will take at least six years before becoming profitable.

Fig. 1 – J Curve

Source: https://pitchbook.com/news/reports/q1-2021-pitchbook-analyst-note-venture-debt-a-maturing-market-in-vc

Blend of Venture Equity and Debt Capital Markets

As venture debt has emerged in Southeast Asia, an increasing number of companies have deployed debt financing to complement equity rounds. To date, there are about 80 – 100 Southeast Asia companies that have already benefited from venture debt.

Genesis Alternative Ventures is a Singapore-based venture debt fund that invests debt capital into promising early-growth startups that are expanding their business presence across Southeast Asia. We will feature 2 Genesis portfolio companies – Horangi Cyber Security and GoWork and share their venture debt journeys.

Example 1. Horangi

Founded in 2016, Horangi is a cybersecurity company that provides security support for enterprises in Asia against cyberattacks through its suite of products and professional advisory services.

Venture debt became a useful, less-dilutive tool for Horangi as it enhanced its cloud security products, increased its talent pool and acquired customers through sales and marketing activities as part of their growth and expansion plans. “As a startup with a short operating history, it is almost impossible to get normal bank loans, which is where venture debt fills in the gap.” Horangi was also looking for partners who could add substantial value to their business and “partnering with strategic investors like Genesis will help propel our next growth stage,” said Paul Hadjy, CEO and Co-founder, Horangi.

“As Horangi scales its business, choosing a venture lender who is committed and understands the business is critical. It’s not only about access to capital, but also the flexibility and the invaluable network that Genesis brings along.” – Dr. Jeremy Loh, Managing Partner of Genesis Alternative Ventures.

Example 2: GoWork

Founded in 2016, GoWork is a leading premier co-working space operator in Indonesia.

“Co-working is not a category anymore, it’s just how people work. It’s a matter of time when every office building or mall in Jakarta will need a space.” For GoWork to double down on its focus on Jarkarta and reach over 100,000 sqm by 2020, the company took on venture debt to fund its working capital. “We wanted to have diversification in our capital structure without incurring dilution,” said Vanessa Hendriadi, CEO & Co-founder, GoWork.

Not only does venture debt help with working capital needs, but entrepreneurs are also seeking “more efficient capital and putting in place additional capital buffers”. – Martin Tang, Co-founder of Genesis Alternative Ventures.

Venture Debt Moving Forward

Venture debt offers an additional channel of financing for entrepreneurs who want to leverage debt financing to balance the cost of capital. Venture debt is set to play a bigger role as more startups are growing amid a global pandemic and are looking for ways to raise additional capital without significant dilution to their equity stakes.

To find out more about venture debt, access the Southeast Asia Venture Debt Industry Report 2021 co-authored by Genesis Alternative Ventures and PwC Singapore here.

^[1] https://pitchbook.com/news/reports/q1-2021-pitchbook-analyst-note-venture-debt-a-maturing-market-in-vc

In Southeast Asia, venture debt is fast emerging as an alternative and complementary source of financing for high-growth technology companies that traditionally only raised equity as a source of capital.

At its core, venture debt is entrepreneur-friendly as it helps founders and cash-hungry startups avoid over-diluting shareholder equity at early stages of a company’s growth. Used appropriately, venture debt can also extend the cash runway between fundraising rounds, sometimes helping companies achieve performance targets set by equity investors (or avoid dreaded valuation down-rounds). Another benefit of venture debt is that, in appropriate instances, it is able to support companies facing unexpected market turbulence or short-term capital traps.

While already an established alternative financing source in the US, Europe, Israel and India, venture debt has only recently emerged in Southeast Asia as a mainstream financing option for high growth tech companies. In 2015, the Singapore Government identified venture debt financing as a key driver to boost the local start-up ecosystem. Singapore launched a S$500 million venture debt programme to encourage qualified lenders to provide venture debt to technology start-ups. In recent years, there has been a marked increase in venture debt activity in the region.

For more information, download the full report here.

Visit PwC’s Singapore Venture Hub

In the past few months, the level of inbound enquiries Genesis has received for venture debt has increased by 30%. This has been the case too for other venture lenders across tech ecosystems where venture debt is an established asset class. In a parallel world, large corporates, as well as PE-backed companies, have been drawing down on available credit lines as an insurance buffer.

Please read part I: Venture Debt – Panacea or Poison – for tech-backed companies during Covid-19

There are many reasons for the increase in venture debt enquiries:

Venture debt for runway extension/insurance buffer: Venture debt can help a company to extend cash runway with lower dilution; Savvy VC investors and founders realise the wisdom in bolstering the balance sheet in times like these. It is better to have venture debt and not need it than to need it and not have it.
Venture debt as part of funding to avoid a downround: With COVID-19 decimating business plans, founders realise the need to raise capital in a form that delays the valuation benchmarking – raising venture debt / convertible rounds can help the company buy time as it adjusts to disruptions caused by the pandemic.
The colour of cash is the same: Founders not knowing the difference between equity and debt. They knock on both doors hoping that one would open.

So when can venture debt be a panacea to startups in COVID-19?

1. Extension of cash runway

The pace of VC investments may slow down during a crisis, it will not stop. Good tech companies will still be able to raise VC money. With the equity cash, these companies can then extend its cash runway with some venture debt.

Related Article : Deal Structure for Venture Debt Success

Notwithstanding the current crisis, startups with a viable model and differentiated offering continue to attract equity funding.

In the US, there continues to be high profile funding rounds being announced.

Payment gateway, Stripe raised a US$600m Series G at a US$36bn valuation;
Online brokerage Robinhood Markets Inc raised US$280m led by Sequoia Capital valuing it at US$8.3bn

Closer to home, we are seeing green shoots of larger than usual funding rounds being completed than pre-crisis :

Dathena raising a US$12m Series A round;
Kopi Kenangan raising a US$109m Series B round;
Kargo, an Indonesian based logistics company raised a US$31m Series A;
Ninjavan raised a massive US$279m Series D funding round;
Indonesian consumer goods mall GudangAda raised US$25.4m in a Series A round led by Sequoia India and AlphaJWC;
Philippines media startup Kumu raised a US$5m Series A;
Thai venture builder RISE raised US$8m in seed funding

A strong equity raise combined with a right proportion of venture debt, will help a startup to extend its cash runway at a lower dilution than a full equity raise. The cash runway extension will allow companies to grow further before the next equity raise – this will potentially allow it to raise equity at a higher valuation, again leading to lowered dilution.

2. Bolstering balance sheet as insurance buffer

For companies that have a reasonable amount of cash on their balance sheet, venture debt is a viable way to further boost that cash as an insurance against a protracted downturn.
In the US, AirBnb managed to raise US$2bn in equity and debt over two separate transactions in April.

In the case of AirBnb, it raised US$2bn in equity and debt in two separate transactions despite having US$3bn of cash on its balance sheet. It was notable that funders were large private equity groups. Media reports of the deal terms and structure suggests that the funding was structured similar to how a venture debt deal could have been done.

Had AirBnb raised the same amount of funds via a sale of shares, it would have resulted in higher equity dilution, longer execution timelines and crystallisation of a lower valuation meaning that later investors would lose money.

3. Avoiding crystallising a down round:

Companies whose business plans have been affected by COVID-19, i.e. will not be able to achieve milestones prior to next equity raise, can use a mix of internal equity funding (usually in the form of a Convertible Note) and venture debt to extend cash runway.
This combination provides the company with much needed cash runway extension and yet avoids setting a valuation benchmark. However, it means that the company has to get things right this time.
- The comfort is that many successful startups have experienced such situations before and gone on to increase valuation by multiples thereafter

Venture debt, if not used under the right circumstances, can be poison.

1. Venture debt as a funding of last resort

We have seen many companies come to Genesis because they have exhausted other avenues of capital sources- whether they be VC money or loans. Venture debt cannot be used as funding of last resort as this is akin to taking equity risks, with a capped return.

2. Venture debt as a source of cheap funding

The other reason for increased enquiries is due to misconception that with global interest rates at rock bottom, venture debt rates must be low as well. On the contrary, most startups are now deemed to be higher risk due to the economic disruption brought about by COVID-19. Therefore, on a risk adjusted basis, venture debt rates have remained flat or slightly higher than pre-COVID-19.

Genesis’ approach to venture debt in COVID-19

COVID-19 has not changed how we fundamentally assess each deal. Despite the increase in venture debt enquiries, deployment of capital is reserved for borrowers that demonstrate the following characteristics:

Sustainable business plan with proven revenues and positive unit economics
Founders with demonstrable leadership and management experience
Backing and guidance by Tier 1 VCs
Cash runway of at least 12 months

Venture debt is not without its risks, however a well structured transaction can help high quality companies to extend their cash runway to tide through tough times.

Resilienc-and-Adaptability-in-the-Face-of-COVID-19-1280x853.jpeg

At this time of writing, numerous countries and cities remain in lockdowns of varying degrees with shops, businesses and schools staying closed. The inconveniences this has brought to daily life/businesses are well documented. I want to share some of my observations on the positives that the lockdown has brought about.

In these unprecedented times, humans have demonstrated the ability to react quickly to the new environment – the speed at which COVID-19 changed the way things were done was breathtaking.

Online-everything. Online services given by religious organisations, online motivational sessions, online ministerial meetings, large scale online press conferences and interviews, online marathon races, online workout groups, online clubbing, online house parties…the list goes on.

New words for the old economy. WFH, e-sign, Paynow, Home delivery, contactless delivery, Zoom Meeting, Teams, Google Hangouts, Whatsapp call, House Party etc. have become de rigueur.

Pivoting. Garment and car manufacturers switching to producing face masks, microbreweries and gin distilleries producing hand sanitiser, Vacuum cleaner factory line producing ventilators, Luxury hotels becoming quarantine centres.

Reimagining work. I had the privilege of conducting a session of the inaugural online career fair of a local university last month over Zoom. We had more than 50 attendees dialling in from their respective homes/offices. Prospective interns watched their screens, listening to what was being shared. They were actively raising hands virtually and asking questions via the chat function. That people felt safe, physically and metaphorically, to ask questions was a big win. All in all, we had an extremely successful career fair with high engagement levels and applications. It is not inconceivable that with video technology / online KYC, workers getting hired without having to physically see a hiring manager prior becomes more prevalent.

Humans have gone through disasters much worse than COVID-19 and thrived. What makes me hopeful is that we have more advanced science and technology at our disposal now than ever before. I am of the firm belief that we will get through and thrive in the same fashion.

“This too shall pass”. The current lockdown is an opportunity to catch up on things that matter and make us better people. Eventually, activities will return to a semblance of normality. The question then would be, ”Did we make use of the lockdown to position ourselves for a rebound?” This could be learning a new skill, pivoting a product to suit social distancing measures, refining workflow processes etc.

At Genesis, we are making full use of this time to do the following:

Housekeeping / Refining internal SOPs
Continued engagement with our portfolio companies with a view to supporting them / exploring new business opportunities / making new introductions to them
Active outreach to LPs both existing and potential to update them on investment portfolio, what new deals and trends we are seeing
Talking to our VC Partners to update them on portfolio companies as well as exchange notes and dealflow
Engaging with ecosystem partners to explore collaboration opportunities that we never had the chance to do so pre-lockdown – they could be webinars, industry thought pieces, mutual introductions etc.

We did not choose for COVID-19 to come disrupt our lives, but we certainly can choose what we want to do with our lives / businesses while we go through this period.

Stay strong and stay healthy.

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